Shell Submits a Plan for New Alaskan Arctic Oil Exploration

Royal Dutch Shell submitted a plan to the federal government on Thursday to try once again to explore for oil in the Alaskan Arctic, following years of legal and logistical setbacks as well as dogged opposition from environmentalists.

While the plan is just a first step in the process, it reflects the energy potential in the Arctic. Shell’s proposed programs consist of two drilling rigs working simultaneously in the Chukchi Sea, which could produce more than 400,000 barrels of oil a day.

Shell emphasized that it had not made a final decision on whether to drill next summer. But it said that the filing with the Interior Department preserved its options.

The efforts, even in this preliminary stage, are likely to rankle environmentalists, who argue that drilling in the Arctic is overly risky because of ice floes, darkness in winter and the presence of several species of already threatened wildlife like polar bears. Several environmental groups were quick to say they would oppose Shell’s latest plan, including with court challenges, if it receives government approval.

Over the last eight years, Shell’s Alaskan Arctic efforts have been plagued by blunders and accidents involving ships and support equipment, reaching a climax with the grounding of one of its drilling vessels in late December 2012 in stormy seas. Environmental groups seized on the episodes as evidence to support their claims about the risks.

Shell, which has already spent about $6 billion on the effort, drilled two shallow wells in Alaska’s Arctic during 2012. But the federal government did not allow Shell to reach the deeper, oil-bearing formations. The company did not have the equipment to contain spills after the testing failure of a containment dome designed to cap a runaway well and collect oil in case of an accident.

Shell’s plans for the Alaskan Arctic had looked doubtful since Ben van Beurden took over as the company’s new chief executive nearly nine months ago. Mr. van Beurden pledged to increase discipline on rising costs and improve cash flow. Under his guidance, the company has begun to sell off underperforming natural gas and oil fields around the United States while stepping up production from its deep water Brazilian and Gulf of Mexico oil wells. Profit is improving, though Shell’s investments in Russia could be at risk if Western sanctions tighten.

The company announced in January that it would not make an effort to drill in Alaska this summer, given the legal obstacles. A federal appeals court had ruled that the Interior Department’s environmental impact review was flawed when it sold Shell over $2 billion in oil leases in the Chukchi Sea.

But in recent weeks, Shell has shown renewed interest in its Alaska efforts by signing an agreement with several Alaska Native corporations to share profits from offshore drilling. Wall Street analysts said Shell could not afford to watch other companies succeed elsewhere in the Russian and Canadian Arctic and not participate in the future drilling.

“These people are paid to play and not to watch,” said Fadel Gheit, a senior oil company analyst at Oppenheimer & Company. “After all the hiccups and bad luck, the company has decided that the upside potential is greater than the downside risk and its worth another shot.”

The Alaskan Arctic is one of the great untapped frontiers for offshore drilling in the United States, with the potential to produce up to a million barrels a day, according to industry experts. But Alaska has suffered a long decline in its oil production because of the aging of its onshore fields and underinvestment.

Gov. Sean Parnell pushed a tax overhaul supported by the oil industry through the Alaska Legislature last year, and this month beat back a ballot referendum effort intended to return the state to its old tax regime. With new tax breaks and incentives, the industry has pledged to invest more in Alaska’s oil fields.

Still, Shell faces many hurdles in its renewed efforts. The Interior Department’s Bureau of Ocean Energy Management must redo the original inadequate environmental impact assessment by the spring when Arctic waters begin to open and Shell can start to move its drilling and support vessels into position.

A coalition of environmental groups, including the Center for Biological Diversity and Earthjustice, are preparing to challenge a new assessment if reaches a similar conclusion to the previous one. A legal challenge, even if its ultimately unsuccessful, could mean more delays for drilling.

“Drilling in the Arctic makes no more sense in 2015 than it did when it was first proposed,” said Brendan Cummings, senior counsel for the Center for Biological Diversity, an environmental activist group.

Shell will also need to have its exploration plan approved by the Interior Department. A Shell spokesman, Curtis Smith, said that the new plan had fortified safety features, including new tugboats, an extra helicopter, additional offshore supply vessels and better management of contractors.

“All to say we’ve taken a critical look at the experiences we’ve had in Alaska over the last several years and this exploration plan takes those learnings into account,” he added.

Environmentalists are similarly expected challenge any approval of those plans. Shell’s separate spill response plan, submitted earlier, is also currently being contested in a federal appeals court based in San Francisco.

“Anyone who has been following this story knows Shell is not Arctic-ready,” said Travis Nichols, a spokesman for Greenpeace, was highly critical of Shell’s planning. “And more importantly, the Arctic will never be Shell-ready.”

Not desperation (although the pubcos have been feeling such pressure for decades) but just opportunity. Drilling/producing in the Arctic won’t be a bed of roses. But the oil patch has dealt with such harsh environments for many years. The Hibernia Field off the east coast of Canada is a good example. About 35 years ago I was drilling in the deepest water ever attempted in the Gulf of México. Anything but simple and it too reeked of desperation. But after the oil spike of the 70’s it was an acceptable opportunity.

One nice thing about operating offshore Arctic compared to onshore Arctic: you don’t have to worry about a bear eating your ass. LOL. Which has actually happened on a number of times on the North Slope including a fatal recent bear attack a few months ago.

Perk Earl on Fri, 29th Aug 2014 3:08 pm

It’s always for profit, but the fact they have to go so far North surely says something about desperate situations require desperate action.

LOL, what if in 20 years the Arctic is jam packed with offshore rigs? Now, that would have to be referred to as extremely desperate to defer peak oil. Ice free in the Summer, ships passing through, gem hunters fanning out in all directions and thousands of oil rigs, with the usual accompaniment of supply ships. What an image!

Brent on Fri, 29th Aug 2014 4:03 pm

Shell must know something they must know that oil is going to spike soon, because right now at these prices drilling in the arctic is not profitable at all.

Makati1 on Fri, 29th Aug 2014 8:08 pm

rockman, if oil were plentiful, the oil giants would not be there. Ice or not, they are getting desperate for new sources and keeping their investors believing in them. When a companies ability to grow disappears, so do they.